What To Look For Before Investing In A Consumer Internet Business

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Food technology platform Zomato has lined up its initial public offering (IPO) July 14-16, in hopes of increasing Rs 9,375 crore. It will be the first in a series of mainstream internet companies and startups to raise public funds in India after the pandemic.

What are the details of Zomato’s IPO?

Zomato’s offering size of Rs 9,375 crore marks an increase from the Rs 8,250 crore previously announced when filing preliminary documents with market regulator SEBI in April. He set a price range of 72 to 76 rupees per share. Offers may be for a minimum of 195 shares, and in multiples of 195 thereafter. Of the total size of the offering, the shares valued at Rs 9,000 crore are a new issue, while the remainder is an offer to sell from Info Edge (India) Ltd.

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Why an IPO during the pandemic?

As the pandemic hit the service industry hard, business improved for mainstream internet businesses after the initial lockdown last year. These benefited once home delivery of food was allowed while restaurants were not allowed to open.

According to Zomato documents, the gross value of orders on its platform fell to Rs 1,093.63 crore for April-June 2020, from Rs 2,684.91 crore in January-March 2020. It then passed. at Rs 2,981 crore for October-December, higher than in the same quarter. Last year. The first nine months of fiscal year 20-21 show an improvement in the unit economy of Zomato’s activity, with higher commissions and delivery costs compared to 2019-2020, and sharply lower discounts. At a press conference on Thursday, Zomato management said that compared to the first wave of Covid, its business had not experienced a negative impact in the second.

What other mainstream Internet companies and startups have gone public, and which are next?

Zomato investor Info Edge will sell part of its stake for Rs 750 crore via the IPO. MakeMyTrip.com and yatra.com travel agencies are listed in the United States; E-commerce companies Infibeam and Indiamart, and recently Easy Trip Planners, have done this in India.

Then, the fintech company Paytm is preparing an IPO of Rs 16,000 crore. Cosmetics company Nykaa, logistics company Delhivery and online insurance aggregator Policybazaar are also reportedly considering IPOs to raise funds.

What are the opportunities and challenges that await Zomato?

Given that the company has seen solid business growth during the pandemic, the question is how its plans will support growth once things normalize. However, Zomato has a presence in an industry that presents a high barrier to entry for new players, which could help it grow as the size of the market grows. The pure play food delivery segment is a virtual duopoly between Zomato and Swiggy.

Last year, US rideshare giant Uber left the food delivery segment in India and sold Uber Eats India to Zomato. Lately, there have been indications that the segment is bubbling with Amazon’s entry into food delivery and that restaurants have launched a “direct order” program bypassing aggregators like Zomato.

How Should Investors View Startups and Mainstream Internet Companies?

Analysts say each startup should be seen as a separate business, not as part of a single basket. Some believe that a company like Zomato has opportunities for big business and growth, and could be a good long-term investment.

“Food ordering has become a social need and, aside from appraisal, I see potential in such endeavors. Investors can access it for long term gains and not just for quotation gains. Even if you don’t get a decent allocation on the IPO (as it will depend on oversubscription), people can buy your shares in the secondary market after listing, ”said the head of the IPO. looking for a leading brokerage firm.

Experts recommend caution before investing in fintech companies, as banks have also increased their digital presence. “For companies that have not been able to clearly define their business model and continue to shift direction, investors should exercise caution,” said a senior official at a financial services company.

What to look for before investing?

Besides the business model and the scope of expansion, it is very important to carefully consider the price of the issue. If the company launching an IPO demands a higher valuation, investors can wait to make an entry.

To get an idea of ​​the quality of the issue and its pricing, it is important to look at underwriting by qualified institutional buyers. A very low subscription level would mean that institutional investors do not see a solid investment proposition. On the other hand, a very high level of oversubscription would in turn translate into a huge retail subscription and very little attribution, thus making the exercise futile.

While a retail investor can apply for stocks worth Rs 2 lakh in an IPO, if the retail subscription level is 50 times, it would mean that the investor would only get stocks. worth Rs 4,000 – which experts say is not worth blocking Rs 2 lakh for 10 days.

However, investors should avoid chasing a high listing, which can often be caused by huge oversubscription. When a large number of investors sell their allocated shares within a week of listing, the share may drop below its issue price. Investors should wait a few days to understand the interests of the company and investors after listing before deciding to invest.


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